Russian dolls: Why not knowing who owns and controls companies is a huge problem

Jun 4, 2014 /

Anti-corruption activist Charmian Gooch argues that corporate secrecy and political unrest are connected — and that ending anonymous companies is a step towards global stability.

In her June 4 speech at the opening of Parliament in the United Kingdom, the Queen announced legislation to clamp down on corporate secrecy. At the same time, the G7 nations are meeting in Brussels to work out what to do about the reason they are no longer the G8: relations with Russia and the situation in the Ukraine.

These two events are more closely linked than they might first appear. So far, economic sanctions on Russia and the companies it controls appear to have done little to quell unrest in the region. Meanwhile, the potential for the current crisis to rewrite the global economic and political landscape was spelt out clearly when Russia signed a $400 billion gas deal with China last month. The other powers are worried.

The role of anonymous companies in triggering this unrest was significant. If you want to hide the kind of corruption that will eventually drive despairing citizens out onto the streets in bloody protest, there are few better ways to do it than setting up a web of sham companies. Like a Russian doll, you can stack one inside another, making it almost impossible for law enforcement, other businesses, civil society, journalists and, most important, citizens, to know who really owns and controls companies.

That’s exactly what happened in Ukraine. The corruption that underwrote the regime of former president, Viktor Yanukovych, was engineered by the use of such companies. My organization, Global Witness, has worked with Ukrainian activists to show how British and Austrian companies were used to disguise who really owned Yanukovych’s palace compound. It’s not just Ukrainian politics, either: according to Reuters, people close to Russia’s political elite have also been using secretive British companies to hide taxpayer financing of lavish palaces on the Black Sea.

Without the use of hidden companies, it would have been much harder for the region’s elites to hide such money overseas. This system keeps the corrupt in power, keeps poor citizens poor, and ultimately poses a real threat to global stability.

That’s why it is good for Britain’s national interest that David Cameron intends to create a public registry of who really owns and controls UK companies, as the Queen announced. That means a strong registry with plenty of good-quality information on company owners. There has been support for this from business groups such as the Institute of Directors.

But, of course, these efforts will only be as good as their implementation. They will also only work if the push towards transparency goes global, because clearly this is a global problem. The Organization for Economic Cooperation and Development has said that almost every economic crime involves the misuse of companies. In the past, Global Witness has shown how the use of secret companies registered in the British Virgin Islands allowed a friend of the Congolese president to acquire mining concessions worth $1.3 billion at a fraction of their market value, and then sell them on at vast profits to international companies. To put that in context, $1.3 billion is twice the country’s health and education budget. Had the deals been done in the open, the Congolese people might have been able to keep hold of this badly needed cash.

There are plenty of other national security risks with secret companies at their root. The Iranian government used them to disguise its ownership of a midtown Manhattan skyscraper in a scheme designed to skirt U.S. sanctions and funnel money from the United States to Iranian agents around the world. The U.S. government recently seized the building and may give the money to terror victims. This is less a case of shutting the door after the horse has bolted than helping to smuggle the horse out oneself. None of this would have happened if laws made it impossible for companies to hide who really owns them. And yet the United States is the worst offender, registering more anonymous companies than any other country in the world.

It doesn’t have to be this way. There is no credible moral or economic argument for doing business like this. That’s why I launched a campaign this year to end anonymous companies. It’s early days but it has already seen support from law enforcement, business groups and eminent figures such as Kofi Annan.

Momentum is building, and current events show why we must keep it going. If we can solve this problem, we will unlock the solutions to a whole host of other thorny issues that threaten our national interests, whether it’s corruption in the Ukraine or perceived terrorist threats. The world will be a much fairer, safer and more stable place if we end the use of anonymous companies.

Charmian Gooch is the co-founder of Global Witness; she won the TED Prize in 2014.